Unleashing those constrained gazelles

Worldwide 600 million jobs are needed over the next 15 years to keep employment rates at their current level. SMEs can and need to play an important role in securing and creating these new jobs, if development programmes revert their focus to job creation with the help of effective trainings and restructured access to finance.

Governments, non-governmental organizations and donors devote extensive resources to specific programmes and broader policies to promote employment and the creation of new firms. Because most employment in low and middle income countries is in small (including self-employment) and medium-sized enterprises (SMEs), these firms are especially targeted. With the current focus on impact measurement, many of these interventions have recently been evaluated rigorously, using experimental or quasi-experimental methods which allow to measure causal effects between program inputs and employment outcomes. Even if the evidence is still flimsy with respect to cost efficiency and the long run impacts of such interventions, some interesting conclusions can be drawn.

Not surprisingly, finance and training programmes address two important bottlenecks. Such interventions are particularly effective if they are implemented in conjunction and target individuals with a minimum of formal education and entrepreneurial spirit. In a recent paper, we have called these entrepreneurs ‘constrained gazelles’, which indicates that these entrepreneurs have a high productivity, but are constrained on the capital market. Our estimates show that in West Africa, about a third of all entrepreneurs running small firms fall into this category. These firms have the potential to create jobs, including for those who are self-employed but lack entrepreneurial spirit. Evaluation studies show that the majority of existing micro credit programmes do not support such firms as target beneficiaries. Moreover, employment creation is often not even a focus of such programmes. To the contrary, many of these programmes primarily aim to achieve other objectives, such as female empowerment or income stabilization. To be effective, finance interventions also need to provide progressive amounts of credit and repayment conditions which allow entrepreneurs to take risks. The literature shows that if repayment sets in with the first month of credit, poor entrepreneurs often do not dare to invest in more risky projects. Complementary entrepreneurship training does not have to be very complex, but it needs to be demand-driven and intense - ‘intense’ meaning that the training would last several months and be conducted several times a week.

The business environment also matters. Institutions which ensure that contracts and property rights can be enforced are crucial to the success of SME support programmes. Upgrading enterprises also requires modernizing their production technologies and organizational structure. ‘Business Development Services’ can make an important contribution here, by providing additional finance conditional on certain innovations, access to new input and output markets or specific expert advice. So far only few evaluation studies have looked into the details of such programmes which makes it difficult to draw general conclusions, but the few studies that exist show rather promising results. Enterprise formalization should be pursued in tandem with such interventions, i.e. further services and assistance including larger credits should be provided conditional on formalization. Our study showed that firms’ propensity to formalize increases if they can expect such benefits in return.

If a large share of interventions which have been subject to a rigorous evaluation failed to deliver jobs, it is often because these interventions failed to focus on job creation. There is, however, no general evidence for poverty traps - small firms are not destined to remain poor. Returns to investment are in fact generally quite high, with 60% per annum being no exception. And these enterprises still hold potential for growth. SMEs can and need to play an important role in securing and creating new jobs. Private sector development needs large and export-oriented firms, but these alone cannot provide the jobs Africa needs to build on its demographic dividend in the next 15 years.